The euro is holding firmer after the ECB left interest rates unchanged but kept the door open to further tightening, with rising energy prices reinforcing concerns about inflation. Expectations of a possible December hike are providing support, although policymakers’ measured, data-dependent approach and broadly stable underlying inflation and wages temper the prospect of an aggressive policy response. The energy shock also threatens growth through weaker purchasing power and business confidence, leaving the euro caught between support from interest rate expectations and concerns over the economic outlook. Attention now turns to preliminary German and Eurozone growth figures for evidence of how well activity is holding up against higher energy costs and tighter financial conditions.

The pound is recovering against the dollar as markets digest a largely neutral UK Budget and persistent inflation pressures keep expectations for further Bank of England tightening in place. Modestly greater fiscal restraint appears insufficient to materially alter the policy outlook, while gilt issuance broadly matched expectations, limiting the Budget’s market impact. BoE policymaker Greene’s warnings that wage disinflation has stalled and second-round inflation risks have increased reinforce support for sterling through expectations that UK rates will remain elevated. However, the dollar continues to draw support from firm US inflation and expectations of further Fed tightening, leaving the pound’s recovery dependent partly on whether those hawkish US expectations begin to ease.

The yen is strengthening as the Bank of Japan’s hawkish pause and firm Tokyo inflation reinforce expectations for a December rate hike. Although policymakers left rates unchanged, Takata’s dissent in favour of tightening and the Bank’s emphasis on upside inflation risks suggest further normalisation remains firmly on the agenda. Falling US Treasury yields are also narrowing the US–Japan yield gap, while hopes for progress in US–Iran diplomacy are weighing on the dollar. Attention now turns to Governor Ueda’s press conference for signals on the timing of the next hike and whether the Bank’s guidance can sustain the yen’s recovery.

The Australian dollar is drawing support from hotter-than-expected inflation and hawkish RBA commentary, which have strengthened expectations for a rate hike at next week’s meeting. Both headline and underlying price pressures have accelerated, with the quarterly trimmed mean measure reinforcing concerns that inflation remains too persistent. Governor Bullock’s warning that anticipated price pressures are starting to emerge has added to the case for further tightening, supporting the Aussie through expectations of higher domestic yields. However, the US policy backdrop remains a constraint: although the Fed held rates steady, its continued emphasis on price stability and two dissents favouring a hike have kept the prospect of further US tightening alive, limiting the Australian dollar’s upside against the greenback.